We
have never met a buyer that didn't have tons of questions.
Which is a good thing. We want our buyers to be as
educated as they want to be and use us as a resource
to get that knowledge. We also find that the questions
can be all over the map. More than we could ever answer
here. But, there are some of the questions we hear
most often. We figured you could start here.
If
you need any further clarification of an answer to
one of the questions, just Contact
Us and we'll get it cleared up for you. Also,
we would be happy to answer any other questions you
may have that we haven't covered here. Just let us
know how we can help. BTW, Lisa thought we should
mention these are specific to the Southern California
market and may not apply to other areas. I'd agree.
(click on the
question to go to the answer)
1.)
I've heard Foreclosures are good deals. Can I get
a Foreclosure?
2.)
I want to buy a fixer to make some money. Will that
work?
3.)
I hear about "no money down" loans. Can
I buy a house/condo with no money down?
4.)
What's the difference between "Pre-Qualified"
and "Pre-Approved"?
5.)
What is a FICO?
6.)
Prices have gone up a lot. Should I wait to buy until
they come down?
7.)
What's wrong with just looking for houses at "Open
Houses"?
8.)
Why don't I just call the agent on the sign?
1.)
I've heard Foreclosures are good deals. Can I get
a Foreclosure?
Yes,
you can get a foreclosure. We've bought lots of them.
We've sold lots of them.
Now,
let's get to the real story. You will find web sites
telling you this is the only way to go. You will notice
they have something to sell. You also hear the seminar/infomercial
people say this is the only way to go. You will also
notice they have something to sell.
So,
what should you do? Let me give you a few things to
think about. The most important thing to be real clear
about is: what exactly do you want to accomplish?
Do you want a nice home for you and your family? Do
you want a "fair" deal? Or, do you want
to be in the "Real Estate Investment" business?
Most
of the time, the real motivation is to get a good
house at a fair price in the neighborhood you want
to live in and in the time frame you want. Only looking
at foreclosures will limit your choices. Most of the
time, the "great deals" won't be in the
right time frame OR won't be in the right neighborhood.
Notice I said "most of the time". The people
with stuff to sell will focus on the exceptions and
make it seem like that is what happens every time.
IT IS NOT! Most foreclosures are sold "at fair
market". Sorry.
We
do not want to discourage you. If you are determined
to get a foreclosure "deal", we will point
out some resources that will help you. And give you
a brief overview of the process. You can definitely
get a good deal on a foreclosure, just make real sure
you are educated about the process and you are willing
to do all the work necessary. You will be competing
with seasoned professional investors.
This
answer has gotten a little long, se we decided to
create a separate Foreclosure page to explain the
process in more detail. (Page in process..we will
link when finished)
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back up to the questions
2.)
I want to buy a fixer to make some money. Will that
work?
That
is a popular strategy. As we mentioned in the answer
above, you just have to be real clear about your goals.
There are a lot of people competing for fixers. Almost
all fixers end up selling for more than they should
to the people who are going to fix them up. Why? Lot
of competition. Some of the competition will guess
wrong about the fix up costs, so they overpay. So,
that is certainly something to keep in mind.
Another
point we would like to bring up is the concept of
"opportunity cost". This is similar to the
classic economic definition with a small twist. Let
us explain. Let's say you are determined to find just
the right property so you can build up a little "sweat
equity". As we write this, it is mid 2003, so
we'll use the market conditions that have existed
for the last 4-5 years. You are going to take your
time and be careful to make it all happen. So you
look and wait. This could take some time. Let's say
it takes you 4-6 months to find just the right property.
You are going to do a lot of work, hoping to create
that "sweat equity" of $20,000 to $30,000.
That's pretty good.
But,
what did the market do during the 4-6 months you were
looking for the right opportunity. The median price
in the Valley is now $400,000. So, appreciation would
have given you 6.6% to 10% equity. That's $24,600
to $37,300 and there was no "sweat". So,
by going after the "sweat equity" opportunity,
it cost you the "appreciation equity". And
you ended up about the same place economically.
So,
"fixers" don't make sense? No, we're not
saying that. If you are very handy with all the tools
of the trades, then it might work well for you. Labor
is a lot of the costs of the fix up project. And,
if you are not picky about the area, the time to find
something can be shorter. So there is still an opportunity
in fixers. In the current market environment
(note the emphasis), fixers may not be all that profitable
if you have to give up
any appreciation.
People
will argue all day that they know about this deal
or that deal where they made lots of money. So, fixers
must work is the argument. But, when you take the
appreciation out of the formula, the actual fixing
didn't do so much to the bottom line.
The
market environment will change. It always does. It
may be better for fixers or it may be worse. The point
is, be real clear on your goals and look carefully
at today's market environment.
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back up to the questions
3.)
I hear about "no money down" loans. Can
I buy a house/condo with no money down?
Absolutely!
But (there always seems to be a "but"),
there is more to the story. Can you buy with no down
payment, no closing costs, no credit check and still
get the rates advertised as 'fixed rates' (currently
5.25% 30 years). Almost.
If your FICO scores (see that question) are excellent,
you have lots of options. You can get really good
financing and there are ways to offset the closing
costs by either having the seller pay them or by financing
them. It is an amazing opportunity. Really ,the rates
are a little higher than those you see on TV or in
the paper, but not a lot higher. From the lenders
point of view, it that old "risk vs. reward"
thing.
We typically see about a 3/4% to 1% premium on the
interest rate for these loans, but they are available
and make owning real estate within reach of more people,
so we love'em. Let's go shopping!
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back up to the questions
4.)
What's the difference between "Pre-Qualified"
and "Pre-Approved"?
This
is an easy one. In the industry, we call the first
one a "Pre-Qual". It can mean you have spent
30 seconds talking to a lender (bank, mortgage bank
or mortgage broker) and they think they can work with
you and get paid for doing so. They may run a credit
report. They may not. In the industry, we have lost
faith in Pre-Quals because it is just too easy to
get a lender to say anything. Most lenders are honest,
but many are, well, scary. And, most of the time,
during the heat of negotiations, we can't tell the
difference. So Pre-Quals have been discounted to almost
useless.
A
Pre-Approval, on the other hand, means a full application
has been filed. Credit reports and appropriate verifications
are already done. An underwriter (the decision maker)
has evaluated the file and said basically "these
people have the loan ready. Get a property that will
appraise for the purchase price or more and the deal
is done." Now, those are some pretty magic words
to a Seller. It is as if you have cash sitting waiting
for the property. It makes you a much stronger buyer.
You know the saying... "Cash talks,..."
(no, we're not going to finish that saying) 
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back up to the questions
5.)
What's a FICO?
We've
been trying to come up with some off-handed comment
like "how should we know". It wasn't coming
together, so we'll just go ahead and lay out the info.
FICO
is a score computed by credit analytics software provided
by Fair, Issacs and Company. They are a publicly traded
company (New York Stock Exchange symbol: FIC). It
is interesting how important their scoring system
has become over the last 5-10 years. To learn more,
visit their consumer web site at www.MyFICO.com.
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back up to the questions
6.)
Prices have gone up a lot. Should I wait to buy until
they come down?
Now,
that is one tough question. We hear that question
all the time. And, we mean ALL the time. So far, our
answer has been "Don't wait even a second!".
As we write this (mid 2003) the blind optimism is
getting harder to support. Ultimately, you have to
make the decision that will serve you best and there
are a lot of factors that go into that. We can certainly
help you analyze your specific situation to help make
a more informed decision.
When
we ask the people that tell us they are going to wait
for prices to fall their reasons for that opinion,
we get two different answers. 1.) We just have a feeling.
And 2.) They can't go any higher. OK, those are interesting
ideas, but can they be supported with data? Economic
and demographic data?
No,
those ideas can't be supported by the data. Real Estate
operates under a very fundamental economic principle
of supply and demand. The real trick is to accurately
determine the various influences on supply and demand.
There are macro issues that have the most influence
and micro issues that "shade" the basic
principle. One other influence that could distort
the supply and demand formula is the act of "speculation",
which is defined basically as betting the house that
the house will go through the roof.
Let us state, we are not economists, but we are passionately
interested in the factors that influence our industry.
With that said, allow us to lay out some data that
we find influential. First, land is scarce. Will Rogers
said a long time ago, "Buy land. They ain 't
making any more of it." If there is only one
of something and nobody wants it, it's not scarce.
Land for more houses in the San Fernando Valley and
Conejo Valley is all but used up. Wood Ranch was a
great development. Los Vientos is going great. Simi
Valley had some nice sized developments. Porter Ranch
is quite nice. And as big as these are, they don't
add all that much to the total housing in these areas.
There are other smaller developments, but most of
the land suitable for development has been developed.
So ...supply is limited, to a large extent. That supports
prices.
If
that was the only factor, it could get scary. So,
let's look at a couple of arguments for increased
demand. Go past the headlines that say Las Vegas is
the fastest growing area, or that Arizona is the fastest
growing state. Look at the numbers. And the capacity
to absorb those numbers. Nevada (which we love, BTW)
had a population just under 2 million people in the
2000 census. A 10% increase is 200,000 people. That's
a lot, of course. The population of California at
the same time was just under 34 million. A 1% growth
would be 340,000 more people. So, California could
grow 10 times slower (it is actually about a third
slower percentage, not a tenth) and still add close
to twice the number of people. If fact, California
is growing at around 1.7% per year. That is around
700,000 people per year, every year (net population
gain!). And that is a lot of new demand! That supports
price.
There
are two other "demand" arguments that seem
to make sense. The first one is pretty obvious and
that is declining interest rates. Interest rates were
about 9.5% around 1990. Don't those sound high now?
Three and a half years ago, rates were still above
7%. Declining rates support price increases in this
overall Real Estate environment. The last important
factor is the cost of rentals. They have gone up dramatically.
So, compare the cost of borrowing (low) with the cost
of renting (high) and add in the tax benefits (favors
owners) and renters find it is about the same cost
to own as to rent. Owning has the benefit of gaining
equity. So, owning wins and demand goes up. That supports
price.
OK,
but what are the risks? Shocks. Economic shocks, like
rates rising back to 8-9%. A shock somewhat particular
to California is the shock of an earthquake. The Northridge
earthquake stopped the market for a few months, but
it was surprisingly quick to recover. A societal shock,
such as the twin towers attack. That affected every
part of the country, but California recovered quicker
economically than New York. (Seriously, we will never
get over that, or acts like that, but the economic
engine does seem to recover in time.)
Ah,
so there are risks? Yes, of course. But, now you need
to figure out the likelihood of the risk factors occurring
in a magnitude that would impact the scenario in question.
The migration into California has been very stable
for a very long time, so it seems like a safe bet
that will continue. Rents? When have you heard of
a landlord giving a rent reduction. Seriously, it
does happen, but it is usually a lagging price, meaning
rents drop after the economy tanks, not before.
What
about rates rising? Well, we feel that is likely to
happen. But, it is the extent of the rise that is
the significant issue. A percent or two will only
have a short term effect. If rates go up more than
about 1.5%, then one of the major components of the
economy shuts down. This causes other components to
get weaker. This, in turn, decreases the demand for
money. Which then causes rates to drop. All this happens
slowly, but it happens. So, rates can only rise so
much. Baring extraordinary circumstances, rate risk
doesn't seem more than a short term risk. And next
year is an election year. Miraculously, the economy
seems to do well in election years. Funny how that
works.
But,
prices could still drop, couldn't they? Yes, of course.
But the factors as they currently exist seem to indicate
that even if they dropped a little, it would be short
lived and minor. And the odds still seem to favor
a stable market for the foreseeable future. If you
buy right (we help with that) and keep the asset in
good condition, you really lessen the downside risk.
But,
hey, this is just our opinion. If you have a different
supportable opinion, we'd love to hear it. Heck, buy
Mark a beer and he'll talk economics all night with
you (unless there's a Lakers game on).
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back up to the questions
7.)
What's wrong with just looking for houses at "Open
Houses"?
Nothing.
Nothing at all. But realize the dynamics from the
other side of the Open House sign. We're going to
site some industry statistics, so bear with us. Only
1% of the houses held open sell to someone visiting
the open house. 7% of all first time buyers find their
Realtor at an Open House. 7% of all Sellers find their
Realtor at an Open House. So... the house doesn't
sell, but does generate buyers and sellers for the
agent holding the open house.
The
real purpose of an Open House is for the agent holding
the house open to get new clients. And there is nothing
wrong with that. Except for one small, but very important
detail. What is the profile of the agent sitting the
open house? What are their qualifications to represent
you, or anybody, in one of the largest financial transactions
you will have in your lifetime?
As
a general rule, agents that sit open houses are newer
agents or agents that don't have much going on. Seriously!
Those are not "Top Gun" qualifications.
Now, we did say "general rule". We do Open
Houses on occasion. We're not new and we do have a
few things going on. But, we've never had anyone ask
us for our credentials. We wish they would have. It
is part of being an informed consumer.
So,
how can you protect yourself? Be demanding. Ask for
credentials. If you don't know what the credentials
they give you mean, make them explain how they will
benefit you. Ask for testimonials. Check references.
You deserve it! Of course, if you are buying in Southern
California, you already have great agents. US! That's
not unreasonable, is it?
One
other thing. Open Houses are OK to get a rough idea
of what the houses are like in a neighborhood, but
only 1 in 10 houses will ever be "Open".
The really good deals are gone too quick to be held
open. Things to think about.
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back up to the questions
8.)
Why don't I just call the agent on the sign?
This
should be clear with this explanation. The agent that
represents a specific property has a written contract
with the seller to get the seller the best deal possible.
Beyond that, he has an overriding legal obligation
to act as the Seller's fiduciary, which means he must
think of the Seller's interest even before his own.
What about your interest? Well, do you have a signed
contract with the agent? We're not saying it can't
work, but why would you want to stack the deck against
yourself?
As
in the prior explanation, you also have the problem
of determining the agents qualifications. Are we being
tough on this? YES! You deserve professional representation.
